The Pension Protection Fund levy rules for 2018/19 have now been finalised, and schemes and sponsors should ensure that they understand any options they have to mitigate the levy they will pay. There is time to complete and certify risk reduction measures before the relevant deadlines, but action should be prioritised where possible. This alert sets out issues and action points in three key areas – contingent assets, deficit reduction contributions and insolvency risk scores.

Overview

There are few surprises in the final Determination; as expected, the levy estimate is confirmed at GBP550 million (a reduction of around 10% from the current levy year), with a levy scaling factor of 0.48. Other changes are confirmed largely in line with the levy policy statement and consultation proposals published earlier in 2017. One piece of good news for schemes that face the highest levies relative to their liabilities, is that the risk-based levy cap will be reduced from 0.75% to 0.5% of smoothed liabilities.

1. Contingent assets – standard forms

Revised Type A and Type B standard form contingent asset agreements (guarantees and security over assets) will be published in mid-January. Contingent assets with an effective date prior to the publication of the new standard forms will be recognised by the PPF for 2018/19. After the publication of the new standard forms, contingent assets will have to be entered into on the new forms to be recognised by the PPF.

In a change to previous expectations, the PPF now intends to require re-execution in 2019/20 of contingent assets that involve a fixed cap, but not those limited solely to either a proportion of section 179 liabilities or to the full section 75 liability. This should reduce the number of schemes that are required to go through a re-execution process next year.

Although the PPF consulted on more substantial changes to the standard forms (see WNTW, 23 October 2017), only a few changes have been confirmed, as follows: 　

• Fixed cap: where the agreement has a fixed cap, wording will be added to clarify that the agreement will cover ongoing demands and insolvency demands but that the fixed cap will only attach to insolvency demands. However, there will also be an option in the agreement to limit pre-insolvency claims, subject to the requirement that the pre-insolvency limit is at least equal to the post-insolvency limit or to the largest annual contribution due under the schedule of contributions.
• Amendment and release criteria: revised wording for the approach to amendment and replacement requirements will be developed; it will remain open to trustees to agree changes in situations where the amendment and replacement rules do not require it.

There have been two changes to the supporting documentation required for the certification of PPF guarantees.

• Firstly, the PPF has confirmed that if a PPF guarantee will result in a levy saving of GBP100,000 or more, then a guarantor strength report will be required to demonstrate that in the event of an employer insolvency the guarantor can meet the guaranteed amount in full. The report must be prepared for the trustees by a covenant adviser (or other appropriate professional).
• Secondly, if there are multiple guarantors, each guarantor can certify an individual realisable recovery, so that the certified guarantors provide the realisable recovery for the Type A contingent asset in aggregate. This will require the preparation of a separate contingent asset certificate for each guarantor.

Action: If you have, or are considering putting in place, a contingent asset, consider the implications of these changes and the appropriate timing for your scheme. Ensure that processes are in place to deliver hard copy documents to the PPF by 5pm on Thursday 29 March 2018 and achieve certification by midnight on 31 March 2018.

2. Deficit reduction contributions

The PPF has simplified the arrangements for certifying deficit reduction contributions (DRCs). Schemes with less than GBP10 million in liabilities (on a PPF valuation basis) will be able to base certification on information provided to the Pensions Regulator on recovery plan payments provided that they are closed to accrual throughout the certification period and had a recovery plan in place for at least part of that period. Certification on this basis does not require further actuarial input where the certified DRC amount does not exceed GBP1 million and relates to contributions documented in the recovery plan.

In addition, all schemes will be able to ignore expenses associated with investment (this covers investment management expenses, advice fees, consulting fees, custodian fees etc) in the certification of DRCs.

Action: Consider the scope for mitigating the levy through DRCs and ensure that processes are in place to certify all DRCs by the deadline of 5pm on 30 April 2018.

3. Insolvency risk scores

The PPF has recalibrated some of the Experian scorecards used to assess insolvency risk, to ensure that insolvency risk is not underestimated compared to past experience. Credit ratings will be used to override model scores where these are available; changes made in one month will feed through to the Experian score for the following month. FAQs providing further information about the use of credit ratings, and the ability to appeal scores calculated based on credit ratings, are available here.

Trustees and scheme sponsors should note that monthly insolvency risk scores for the period 31 October 2017 to 31 March 2018 will be used to calculate the average score for the 2018/19 levy year (in future levy years, 12 months’ data will be used).

Action: It is important to ensure that data and scores are up to date by checking www.ppfscore.co.uk. The PPF plans to add a link to Standard & Poor’s ‘what-if’ tool shortly to allow you to test how changes to accounting information will affect your credit model score.

Key deadlines for the 2018/19 PPF levy